What Is Bitcoin Dust?
Bitcoin dust refers to the small amount of bitcoin leftover or unspent in a transaction that is lower in value than the minimum limit of a valid transaction. Thus, processing the transaction is impossible, trapping a tiny amount of Bitcoin in a wallet or address.
- Bitcoin dust is a series of trace amounts of bitcoins that individually are less valuable than the computing power or fee that is required to process them; as a result, the transaction is impossible to process.
- The cost of the fee to process a bitcoin transaction fluctuates based on the volume of transactions on the network.
- While Bitcoin dust can slow down network transactions, attempting to clean up Bitcoin dust can create a privacy problem, especially for small users.
Understanding Bitcoin Dust
Bitcoin dust is the small amount of Bitcoin that remains in a particular wallet or address because the monetary value is so tiny that it is below the amount of the fee required to spend the bitcoin. It makes the transaction impossible to process.
Whenever any transaction occurs on the bitcoin network, it needs to be validated for authenticity so the transaction can be processed in a reasonable amount of time. Miners validate the transaction and add it to the blockchain network. They are paid a mining fee for performing this service (this amount can vary).
Due to the working mechanism of the blockchain network, at times the mining fee can be higher than the actual amount of the transaction. Bitcoin dust refers to a bitcoin transaction amount where the fee is higher than the transaction amount, making it impossible for the transaction to occur.
As of March 6, 2021, the average Bitcoin transaction fee was $18.58, up from $0.59 a year ago.
Example of Bitcoin Dust
For example, you start with an unspent transaction output (UTXO). This is Bitcoin at a place on the network that hasn't been spent. You must have one or more UTXO to initiate a transaction, and one or more UTXO are created at the same time.
The Bitcoin process involves a fee for the miners who are recording the transaction on the blockchain; that fee is proportional to the number of bytes the transaction occupies on the blockchain. Each UTXO requires a number of bytes, so the more UTXOs you have, the larger the transaction. Consequently, the larger the fee.
If a user has one Bitcoin stored in one UTXO, it will cost less to transact it than one Bitcoin spread across 10 UTXOs of 0.1 bitcoin or 100 UTXOs of 0.01 bitcoin. When you get to very small numbers of Bitcoin in a UTXO, the cost of recording the transaction on the blockchain will be greater than the value of the Bitcoin.
Such minuscule transactions, if initiated, are dropped, and need to be carried out again between the sender and receiver. This Bitcoin dust can remain in different wallets, making it a worthless holding until the mining fee comes down (or more bitcoins are added to the wallet to process a larger transaction).
Disadvantages of Bitcoin Dust
A disadvantage—and more importantly, a risk—of bitcoin dust is the chance of de-anonymization, which is when a person's identity can be linked to their Bitcoin transactions.
Hackers have developed a strategy called a dust attack where micro amounts of Bitcoin dust are sent to an unsuspecting user's wallet. When the user spends the dust-tainted, hackers use software to analyze the user's other transactions and develop an identity profile for malicious purposes.